Where Is All The Islamic Wealth Going?

London: Islamic banking and finance (IBF) is swiftly growing in countries outside the Organisation of Islamic Cooperation (OIC) block, especially in the United Kingdom that houses six fully-fledged Islamic banks (one retail and five wholesale), making it the most important centre of Islamic finance outside the Muslim world.

The global Islamic financial services industry attained the size of $2 trillion by the end of 2015. Islamic banking segment, which accounts for 75%, dominates the industry. Sukuk, although much talked about, is only 15% of the total Islamic financial assets.

Islamic fund management segment, albeit a small component, is slowly developing. Takaful and microfinance, on the other hand, have yet to attain any significant level of development.

Financial breakdown

Islamic wealth management, which is technically part of the Islamic asset management sector, is at present highly under-developed. Islamic wealth estimated to be $11.3 trillion is, on the other hand, steadily growing.

Muslim high-net-worth individual hold an estimated $3.35 trillion, which is less than 30% of the total Islamic wealth. The remaining 70% is held by Muslim businesses, Islamic financial institutions, the mass affluent, and by governments in the OIC countries.

In terms of geographical incidence of Islamic wealth, the Gulf Cooperation Council region tops the list, with $2,337 billion. In the wider Middle East and North Africa region (including Iran and Turkey) there is an estimated Islamic wealth of $3,895 billion. Other important regions are the Association of Southeast Asian Nations ($1,747 billion) and Africa ($1,000 billion).

The volume of $11.3 trillion of Islamic wealth therefore poses a question. While the global Islamic financial industry is merely $2 trillion, where is over $9 trillion of Islamic wealth located and invested? This is the so-called missing dollar puzzle.

The missing dollar puzzle

The missing dollar puzzle is not necessarily a puzzle. It can be explained with the help of the gap between the potential and actual size of the global Islamic financial services industry.

Potential size of the global Islamic financial services industry can be defined as the assets under management of the institutions offering Islamic financial services to all those who would like to have access to such services, and to all those who would like to use Islamic financial services but have excluded themselves voluntarily because they are not available.

The gap between the potential and actual size of the Islamic financial services industry exists because the suppliers of financial services do not meet the full demand – purely unmet demand.

On the demand side, not all those who require Islamic financial services actually have access – involuntary financial exclusion; and there are certain people who otherwise have access to Islamic financial services but are not entirely satisfied.

Supply-side limitations

The gap between potential and actual size is primarily because of inadequacy of supply of Islamic financial services. In particular, there are three reasons for this gap, financial institutions, including banks, regulator and other stakeholders have faced challenges to adjust their businesses to develop a comprehensive framework for the development of Islamic banking.

As tapping the financially excluded has been challenging even for conventional banks and financial institutions, Islamic banks and financial institutions (IBFIs) have found it even more difficult to reach out to this segment of the market.